22 December 2010

Toronto-Dominion Bank may continue to make acquisitions in the U.S. after increasing its bet there with the $6.3 billion purchase of Chrysler Financial Corp., capping a record quarter for U.S. takeovers by Canadian lenders.

“We’re not deal junkies, but we keep saying what we’re looking for,” Clark said yesterday in a telephone interview. “We want $10 billion (in assets) or less deals; tuck-ins that add to our franchise and meet our strategy.”

The purchase of Chrysler Financial adds to the more than C$20 billion ($19.6 billion) that Canada’s second-largest bank spent on U.S. acquisitions since 2004. Toronto-Dominion’s U.S. territory spans 16 states from Maine to Florida with 1,269 branches, the first time a Canadian bank has more locations south of the border than at home.

“These small transactions have ended up with us having a pretty significant franchise in the United States,” said Clark, 63. “We clearly have very strong market presence down the east coast of the United States; now we’ll be in the top five for bank-owned auto lending.”

Toronto-Dominion and Bank of Montreal are among Canadian banks that are taking advantage of their relative strength to add assets in the U.S. as troubled Europeans lenders pull back. Bank of Montreal last week agreed to buy Wisconsin’s biggest bank for $4.1 billion.

HSBC Holdings Plc, Britain’s biggest bank, bought U.S. subprime lender Household International Inc. in 2003 for $15.5 billion, in its biggest-ever acquisition. Following the bursting of the subprime bubble, HSBC closed the U.S. consumer finance division to new customers in 2009 after more than $53 billion of loan-loss provisions in North America. London-based HSBC also sold a $4 billion U.S. car loan portfolio this year, while Allied Irish Banks Plc sold its stake in Buffalo-based M&T Bank Corp. for $2.1 billion.

“The European banks are not in any kind of a position to compete for these assets, and the Canadian banks certainly are,” said Tony Demarin, chief investment officer at BCV Asset Management in Winnipeg, Manitoba, which manages about C$250 million, including Toronto-Dominion shares. “This is a once-in- a-decade, once-in-a-20-year opportunity.”

Canada’s banking system has been ranked the world’s soundest for three straight years by the Geneva-based World Economic Forum. Lenders including Toronto-Dominion and Royal Bank of Canada withstood the worst financial crisis since the Great Depression without taking government bailouts, and recorded only a fraction of the $1.31 trillion in writedowns taken by banks and brokers worldwide.

Toronto-Dominion’s purchase follows the bid last week by Bank of Montreal to buy Milwaukee-based Marshall & Ilsley Corp., The acquisitions mark the biggest quarter for Canadian bank deals in the U.S. in at least 12 years, according to Bloomberg data.

Toronto-Dominion, which operates south of the Canadian border as TD Bank, began its U.S. expansion in 2004, convinced that there were limited opportunities once the federal government blocked Canadian banks from buying each other.

In August 2004, Toronto-Dominion announced it would buy 51 percent of Portland, Maine-based Banknorth Group Inc. for $3.5 billion. A year later, the bank sold TD Waterhouse to TD Ameritrade Holding Corp., making it the largest shareholder in the Omaha, Nebraska-based brokerage.

By 2007, Toronto-Dominion acquired the rest of Banknorth for $3.19 billion, with Clark installing former risk officer Bharat Masrani as head of the U.S. operations. In March 2008, the bank bought Cherry Hill, New Jersey-based Commerce Bancorp for about $8.33 billion. Toronto-Dominion added South Financial Group Inc. this year for $191.6 million and now has about 200 branches in the U.S. southeast.

“We obviously have an unbelievable deposit-gathering machine,” said Clark, who joined the bank in 2000 and became CEO in 2002. “Now we need to complement it with an asset- gathering machine.”

The purchase of Chrysler Financial from Cerberus Capital Management LP will add $100 million to Toronto-Dominion’s earnings by 2012, and the bank forecasts new loan originations of about $1 billion a month the following year. The bank expects to surpass a target of $1.6 billion a year in U.S.-based profit within three years, compared with $1 billion in earnings last fiscal year.

“It gives them a big book of auto-loan business you will have gone through with a fine-toothed comb, and TD has the ability to borrow at a better rate than Cerberus would,” said Terry Shaunessy, President of Shaunessy Investment Counsel in Calgary, which manages about C$200 million. “TD has shown it has very good credit analysis.”

Chrysler Financial, based in Farmington Hills, Michigan, has about 1,850 employees and will have $7.5 billion in loans when the transaction closes. About 90 percent of the loans are in the U.S., and 10 percent in Canada. Chrysler Financial isn’t related to Chrysler Group LLC, the company that’s now controlled by managers from Fiat SpA.

“In our view, the largest risk in the transaction is that the company will be unable to hit its average loan balance targets for 2012 of $10 billion,” said Brian Klock, an analyst at Keefe, Bruyette & Woods. “We believe this target should prove manageable.”

Toronto-Dominion Bank is set to become one of North America’s top five auto lenders after agreeing to pay $6.3bn in cash for Chrysler Financial, the vehicle finance group owned by Cerberus Capital Management.

The bank said it aimed to restore Chrysler Financial to its former strength.

“This is an opportunity for us to take advantage of a market that was clearly disrupted,” Bharat Masrani, head of the bank’s US operations, said of the deal, announced on Tuesday.

The deal also allows Cerberus to extricate itself with a modest loss from its ill-fated $7.4bn acquisition of Chrysler in 2007. Cerberus retained the financing arm when Chrysler, the smallest of Detroit’s three carmakers, was restructured under bankruptcy protection last year.

Apart from receiving the $6.3bn of cash, Cerberus is retaining about $1bn of non-auto assets.

Ed Clark, TD’s chief executive, said the car loan business had held up well during the recession: “People want to keep their cars, because if they don’t have cars, they don’t have jobs.” he said.

Chrysler Financial’s loan portfolio has shrunk from a peak of $75bn during the last economic upswing to just $7.5bn now, and it has laid off half of its workforce. “During this time our origination engine was idling but we knew we had a valuable franchise,” said Tom Gilman, Chrysler Financial’s chief executive.

The group, which will be rebranded under the TD name by next spring, aims to sign up at least $1bn a month in new loans within the next three years, expanding its portfolio to a book value of $20bn-$30bn. It will focus on prime and near-prime customers.

It has recently signed up 400 car dealers a month, and expects to have relationships with 5,000 by 2013, more than double the number before the crisis in the North American car and banking sectors. TD said that Chrysler Financial could generate a return on capital of about 20 per cent within three to four years.

Mr Gilman said the company had preserved its technology and retained critical expertise under Cerberus’s ownership. It has repaid much of its debt, including funds advanced under the US government’s Tarp programme.

TD, one of only a handful of banks worldwide that has retained a Moody’s triple-A credit rating, has been looking for some time to expand its US assets in line with the growing deposit base.

TD has more retail outlets in the US than in Canada as a result of a series of acquisitions over the past six years., including New Jersey-based Commerce Bank (subsequently rebranded TD Bank) and, most recently, four banks in the south-east put up for sale by US regulators. The carmaker is now controlled by a union healthcare fund, and the US and Canadian governments.

Mr Clark said the addition of Chrysler Financial did not signal a drive to expand the US branch network beyond the east coast: “This gives us a national asset strategy to complement our local deposit-gathering strategy.”, he told the Financial Times.

Toronto-Dominion Bank took another step toward its goal of becoming a top retail player in the U.S. with the $6.3 billion purchase of the former auto-lending arm of Chrysler.

TD said Tuesday the purchase of Chrysler Financial Corp. from private-equity fund Cerberus Capital Management LP gives the bank a big presence in a growing and profitable part of the consumer-loan business, as well as another place to invest some of the roughly $80 billion in U.S. deposits that exceed its loans.

The acquisition, which is slated to close before the end of April, will make Canada's No. 2 bank one of the five biggest auto lenders in the U.S., on top of the top-ten ranking the bank already has in terms of deposits, said Chief Executive Ed Clark.

The purchase is also the latest sign of how Canadian banks, which came through the downturn relatively unscathed, are using their financial strength to expand in markets like the U.S. TD earlier this year bought four small, troubled banks from the Federal Deposit Insurance Corp. to extend its footprint down the U.S. eastern seaboard from Maine to Florida. Last week, Bank of Montreal said it was buying a big Midwestern bank in a $4.1 billion share swap.

TD's auto-loan sales pitch will be, "Here's a bank that was not touched by the downturn, has more deposits than it has assets, and it wants to lend you money," said Mr. Clark, in an interview.

Mr. Clark said TD chose auto loans over other types of assets it looked at because losses in the U.S. stayed relatively low throughout the downturn, and industry watchers think volume is poised to grow quickly as the economy recovers.

"It's clear people want to have cars, because if they don't have cars, it's hard to have jobs," said Mr. Clark.

But the expansions down south, while the U.S. economy remains in a funk, are risky as well.

"Whether you're looking at Royal Bank [of Canada], Bank of Montreal or Toronto-Dominion, none of them on their U.S. banking businesses are generating adequate rates of return in the current environment," said Brad Smith, an analyst at Stonecap Securities in Toronto. "The big risk now is that the U.S. economic environment does not snap back in a sustainable way, which means that you're putting more capital in" and still getting a poor return.

Chrysler Financial, which was peeled off from its car-making parent after Chrysler filed for bankruptcy protection, hasn't made many loans since the U.S. government bailed out the car company in late 2008. It has seen its loan book shrivel to an expected $7.5 billion by the time the deal closes, from $26 billion just more than a year ago. That shrinkage could be hard to turn around, with a reduced sales force pushing car loans that last an average of three years.

"We are having trouble understanding where the loan volume growth will come from and how TD will be able to jump-start Chrysler Financial to generate exceptionally large loan growth after effectively being dormant for well over two years," wrote Barclays Capital analyst John Aiken in a comment on the deal.

Last week, Mr. Aiken lowered his target on Bank of Montreal's share price by 14% to C$60.00, saying the acquisition it announced would lower profitability for several years.

TD estimates Chrysler Financial's portfolio is worth only about $5.9 billion when liabilities are stripped out. It is paying a $400 million premium for what it believes is the value of Chrysler Financial's business, including loan-processing infrastructure, a sales force of 100, relationships with 2,000 car dealers and a million outstanding customers.

The biggest risk is "the time it's going to take us" to get that auto-loan book back up to an average of $20 billion-$30 billion, said Mr. Clark—close to the amount of business Chrysler Financial was doing at its peak. Mr. Clark said TD is planning to double the car-loan sales staff to about 200 and invest about $500 million in operating capital. It is hoping to reach a sales volume of $1 billion a month by 2013, and its targeted loan amount in three or four years, for a 20% return on invested capital. Mr. Clark said TD will offer the auto loans under the TD name and drop the "Chrysler" moniker—a move that will help the bank expand its brand beyond the East Coast, where most of its U.S. branches are based, with minimum cost and integration headaches.

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Bloomberg, Cristina Alesci & Zachary R. Mider, 21 December 2010

Cerberus Capital Management LP will recoup about 90 percent of its initial investment in Chrysler after the sale of the automaker’s former lending unit to Toronto-Dominion Bank, according to two people with knowledge of the transaction.

Cerberus will get about 75 cents on the dollar in cash when the sale of Chrysler Financial Corp. closes, said the people, asking not to be identified because the New York-based firm is private. Including about $900 million of assets Cerberus is retaining as part of the deal, the company will be left with a loss of 10 percent on the initial investment in the automaker and its finance arm.

Toronto-Dominion Bank today agreed to buy Chrysler Financial for $6.3 billion in cash, adding an auto-finance company in its second-largest acquisition. The purchase includes $5.9 billion in assets and about $400 million in goodwill. Cerberus, the hedge-fund and buyout firm led by founder Stephen Feinberg, bought a majority stake in Chrysler for $7.4 billion from DaimlerChrysler AG in 2007, part of a wager on the U.S. auto industry that included the 2006 takeover of General Motors Corp.’s auto lender.

The deals preceded a decline in U.S. auto sales that sent both carmakers into bankruptcy. Feinberg, 50, subsequently lost control of both GMAC and Chrysler and held on to Chrysler Financial. The lender repaid its $1.5 billion in U.S. Treasury Department bailout funds last year and in July sought to return to large-scale lending. The automaker, known as Chrysler Group LLC, is now controlled by managers from Italy’s Fiat SpA.

Chrysler Financial, based in Farmington Hills, Michigan, has about 1,850 employees and will have about $7.5 billion in loans at the closing of the transaction, according to an investor presentation Toronto-Dominion released today. About 90 percent of the loans are in the U.S., and 10 percent in Canada.

Toronto-Dominion is recognizing the net value of the assets at $5.9 billion on its own books, more than the $5.2 billion value on Chrysler Financial’s, according to a person with knowledge of the transaction. Based on Chrysler Financial’s value, Toronto-Dominion is paying about 1.2 times the book value, the person said.